The latest consultation on defined benefit transfers underlines the perils of default positions. In effect, transferring from a DB scheme is not thought to be a good idea for most.
The key point in the consultation is the attack on contingent charging – many advisers have seen people reject sensible advice fees for a so-called free service which, in reality, is anything but.
There’s no doubt that given some of the comments around ongoing charging we all need to respond to this paper. That response needs to be offering a review of these proposals, pointing out logistical flaws and trying to get us to a point where the advice gap shrinks instead of growing exponentially.
If we now have to levy the same fee for those who are recommended to stay put as those who transfer, then those remaining in DB will be cross-subsidising those who are transferring out.
Current charges for DB transfers don’t just represent time spent, they reflect compliance costs and higher professional indemnity insurance costs. In other words, a risk premium. This paper makes it clear that merging the costs of a transfer with those of other items being advised on will not be allowed. Given DB transfers are now full and not focused advice, I am unclear how that will be disclosed and agreed without confusion and accidental breaches.
The legal profession used to take brickbats for the legal bills following a house purchase. A firm I worked with asked me how I would respond to such challenges so I redesigned their bill to emphasise who got what from the invoice i.e. who got the stamp duty and who got the fees. Suddenly clients began to understand who caused the lion’s share of the costs.
Firms need to be open with their clients on the cost of compliance, including FSCS and PII. We need to produce information like the Haynes manuals on cars with the cutaways and cross sections.
It is not just the FCA fees, FSCS and PII, it’s the time that compliance takes, e.g. from digesting this recent consultation paper to implementing product governance and even CPD. We do none of this for fun, we have to do it to remain professional and compliant.
I suspect many clients would give up their right to protection from FOS and FSCS if they knew the effect of compliance on costs – specifically, the impact regulation, and picking up the tab for the sector’s bandits, has on what we need to charge to maintain and invest in an advice business.
I believe with the holy trinity of Woodford, London Capital and Finance and the spiralling cost of giving advice we are at a tipping point – there’s no time to lose, we all need to respond.
Rob Reid is principal of CanScot Solutions